Published October 20, 2009

Case opens window on hedge fund secrets

Galleon boss in insider trading case had his network of spies: prosecutors

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(NEW YORK) Clandestine meetings.

Bail set at US$100m: Rajaratnam leaving the New York federal court on Friday

'Secure' phone lines.

Wiretaps.

In an operation more worthy of a spy agency than a regulatory authority, the US Securities and Exchange Commission employed techniques normally used in counter-terrorism cases to charge hedge fund manager Raj Rajaratnam for insider trading. The result is a peek into the usually secret world of hedge fund operations.

Not only is the billionaire founder of Galleon accused of running an extensive insider trading scheme that allegedly netted more than US$20 million in illicit profits, he is also alleged to have funnelled some money that eventually made its way to funding terrorism in his native Sri Lanka.

Information leaked about Google's quarterly results in July 2007 led Rajaratnam to bet against the company. The trade led to an US$8m profit.

Rajaratnam, who is personally worth around US$1.3 billion, had in 2005 created a charity called Tsunami Relief. It gave US$1.5 million to the Tamil Rehabilitation Organisation, a group officially dedicated to helping victims of the fighting. But prosecutors have since charged the Tamil charity with aiding the separatist Liberation Tigers of Tamil Eelam and its non-profit status has been suspended.

Rajaratnam's more immediate problem is insider trading. On Friday, he was charged with relying on a vast network of company insiders and consultants to make more than US$20 million in profit from 2006 to 2009 from trades in companies including Hilton and Google.

In all, six people were arrested.

While trading secrets, though, one crucial piece of information was not shared - several of the phones were tapped.

The wiretaps were made with the help of an unnamed cooperating witness who was said to ply Rajaratnam with information originally to land a job. The witness, who began cooperating in November 2007, has agreed to plead guilty in the hope of receiving a lesser sentence.

Rajaratnam first asked this job applicant to name companies where he had an 'edge' - access to inside information, prosecutors said. Although he wasn't hired, he began feeding the Galleon boss with information on various companies, including Blackstone Group's US$20 billion buyout of Hilton the day before the announcement which helped Rajaratnam make a neat US$4 million profit.

The 52-year-old was charged with four counts of conspiracy and nine counts of securities fraud. Bail was set at US$100 million.

Rajaratnam holds dual citizenship in Sri Lanka and the US and studied at the Wharton School at the University of Pennsylvania. His lawyers protest his innocence but many tipsters have lined up against him.

Among them was a Moody's analyst who was paid US$10,000; an employee at an investor relations firm working for Google; and Robert Moffat Jr, an IBM senior vice-president for systems and technology.

One defendant, Rajiv Goel, told Rajaratnam in March last year that he was tired of working at Intel and would exchange information about a potential investment by the company in Clearwire for a job with one of Rajaratnam's 'powerful friends'. Rajaratnam made a profit of US$579,000 from trading in Clearwire stock.

One main player in the scheme was Danielle Chiesi, a former Bear Stearns executive who worked at another hedge fund, New Castle Partners. She is accused of supplying tips about companies like Akamai and Sun Microsystems to Rajaratnam and of illegally trading on the information for her firm.

Closely cooperating with Chiesi was Mark Kurland, a former senior executive at Bear Stearns Asset Management who is now New Castle's president.

Prosecutors say the scheme produced some wildly successful investments. Information leaked about Google's quarterly results in July 2007 led Rajaratnam to bet against the company. The trade led to an US$8 million profit.

Much of the often-salty telephone dialogue captured by federal investigators relates to Akamai and Advanced Micro Devices, the chipmaker.

Rajaratnam and Chiesi drew upon a wealth of insider sources for their investments in the two companies: Anil Kumar, a McKinsey executive working on AMD's reorganisation and a Galleon investor; an unnamed Akamai executive; and Mr Moffat, a friend of Chiesi's who learned of AMD developments through the chipmaker's business ties to IBM.

'Danielle, I have a major present for you,' the Akamai executive told Chiesi on Oct 10, 2008, according to court filings.

Recorded conversations between Rajaratnam and Chiesi appear to show that they were aware their information was far beyond what the market knew.

'If the two of us weren't close to the company as we are, would you be long the stock?' Chiesi asked Rajaratnam on Aug 26, 2008, referring to AMD.

'No, I wouldn't be,' he responded.

She added that she would not have touched the company with a '10-foot pole'.

The two also showed concern about the consequences of their schemes being discovered.

On Aug 27, Chiesi told an unnamed co-conspirator: 'I'm dead if this leaks. I really am and my career is over.'

At one point, Rajaratnam grew worried that a former employee was wearing a wire, prosecutors said.

No doubt, prescience that could have been better served playing the market. -- NYT, AFP, Reuters, Bloomberg